Why You Shouldn’t Open Your CDs in a Hurry, Despite Rising Interest Rates

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Holding cash is dangerous.

Key Point

• CD rates are rising following the Federal Reserve rate hike.
• While it may be tempting to open the CD, you may want to refrain from doing so for a number of reasons.
• Interest rates could rise further, and now may not be the right time to tie up your money.

The Federal Reserve is on a mission to slow the pace of inflation. To achieve that goal, the Bank has aggressively implemented interest rate hikes that have pushed up borrowing costs. This is bad news for consumers. Because it’s now more expensive to hold a credit card balance or sign a car loan. But the good news is that higher interest rates are giving savings accounts and CDs a more favorable outlook.

Over the past few months, both savings accounts and CDs have offered customers higher interest rates. Also, since CDs typically pay higher interest rates than savings accounts, you may be tempted to open a CD even though it means locking your money for a preset period of time. Hmm.

But before doing that in a hurry, it’s worth considering the downsides.

1. There is still room for interest rates to rise

When you open a CD, it locks you into a specific interest rate for a predetermined period of time (whereas with a savings account, the interest rate can change from day to day or week to week). The Fed hasn’t finished raising rates, so CD rates could be even higher than they are now in a month or so. So, for example, he might actually be at a loss if he signs up for a two-year CD.

2. I want easier access to money

If you have money in your savings account, you can withdraw as much of the balance as you want. For CDs, no actual withdrawal is required. I usually keep the CD or cash it all out. However, cashing in a CD before it expires usually results in several months of interest being charged.

On the other hand, a Fed rate hike could spur a recession. As borrowing gets higher, consumer spending may fall. If it happens only moderately, it can slow inflation without an undue negative rebound. .

With that in mind, now may not be the best time to lock some of your money. You may need to use your personal cash reserves to cover your living expenses while you are there. But if some of your money is tied to his year or two CD, it can be tough (or you could be stuck with penalties).

Think twice about opening CDs

Storing money in CDs has many benefits, but before you rush to pour money into CDs, think about what your cash is like and whether it will cost you to maintain a better rate. Think ofand if you that is When opening CDs, it’s best to stick to the shortest possible duration to minimize risk on both counts.